Obtaining higher value, more flexible, and more integrated services than internal sources can offer.

Improving the company’s capacities to stay current and to innovate by interacting with “best in world” knowledge sources.

Achieving cross-divisional coordination and shareholder value gains that the company — for internal structural or political reasons — could not otherwise achieve.

Outsourcing Knowledge-Based Services

The drivers for these trends are formidable. As the service sector has grown to embrace 80 percent of all U.S. employment, specialized service firms have become very large and sophisticated relative to the scale and expertise that individual staff and service groups have within integrated companies — whether in services or manufacturing (see Table 1).

Table 1

These specialists can develop greater knowledge depth, invest more in software and training systems, be more efficient, and hence offer higher wages and attract more highly trained people than can the individual staff groups of all but a few integrated companies. Given this greater knowledge depth and wider range of customer interactions, they can also become much more innovative than their internal counterparts might. Companies as diverse as British Petroleum, DuPont, MCI, Dell Computer, Beaumont Hospital, Ford, State Street Bank, Ameritek, Nike, and Argyle Diamonds dramatically illustrate potentials. Properly developed, strategic outsourcing substantially lowers costs, risks, and fixed investments while greatly expanding flexibility, innovative capabilities, and opportunities for creating higher value-added and shareholder returns.3 Dell Computer provides a classic example of how strategic outsourcing can revolutionize an industry:

Dell has grown at an 89 percent compounded rate for some years, achieving $700,000 of sales per employee in its fast-moving, competitive business. Dell concentrates its own resources on a superb customer knowledge and support system downstream and a shared information system that deepens its relationships with suppliers upstream. Outside suppliers provide virtually all Dell’s componentry design and innovation, software, and (non-assembly) production for its computers.

About the Author

References

1. As used here, strategic outsourcing includes both the relatively permanent purchase of goods or services in a particular category from single or many different suppliers. It can include techniques from spot buying to strategic alliances. I have covered the use of these different techniques elsewhere. See: J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,”Sloan Management Review, volume 35, Summer 1994, pp. 43–55.

10. Boston Consulting Group and Braxton Associates were the first groups to develop value chain analyses for other purposes. See: B. Henderson, Henderson On Strategy (New York: Free Press, 1980).Quinn, Doorley, and Paquette were the first to redefine such analyses for core competency purposes. See: Quinn, Doorley, and Paquette (1990b).

11. For a discussion of each and numerous concrete examples, see: Quinn, Zien, and Baruch (1997), chapter 7.

12. Office of U.S. Trade Representative, U.S. National Study on Trade in Services (Washington, D.C., Government Printing Office, 1983).

15. The U.S. Air Force, in the design of combat aircraft, was probably the first institution to use this technique consistently and call it by this term, although DuPont used it extensively to establish priorities for its 1930s plastics introductions.

16. National Research Council, Information Technology in the Services Society (Washington, D.C.: National Academy Press, 1994).

27. Strategic tracking systems monitor elements of the outside supplier’s performance that could affect the viability or direction of the company —not merely its cost efficiency. Strategic monitoring systems constantly reassess such things as the supplier’s personnel and facilities investments, partnership and marketing positions, changing strategic risks, and geographic and portfolio investments.